22 Embarrassing Photos From Kmart's New York City Stores Explain Sears Financial Tailspin

Sears should be embarrassed by the state of its New York City stores.

The current financial state of Sears Holding Corp. (SHLD) -- caused in large part by years of under-investment in its stores -- may be perfectly captured in the sad conditions at two of its most prominent Kmart locations.

In a push to bring the discount shopping model that worked so well for years in suburban America to tourists and higher income city folks, Kmart swung open the doors on Oct. 3, 1996 to its first-ever New York City store in transit hub Penn Station. It's a gargantuan store, with about 141,000 square feet spread across four floors. People could either enter the store underground through the always busy Penn Station or outside on 34th Street, just a stone's throw away from Macy's (M) iconic Herald Square department store and sports arena Madison Square Garden.

About a month later, a second Kmart store of about the same size opened in the city on Broadway between Eighth and Ninth Streets.

At the time of the openings (Kmart had over 2,100 stores open back then, compared to 883 today), Kmart execs had high hopes for two shiny new stores situated in the city that never sleeps. ''I think they'll give us a good look, and I think we'll win them over,'' former Kmart Chairman and CEO Floyd Hall was quoted as saying, adding, ''Manhattan is ripe for a discount strategy.''

Kmart's dimly lit store in New York City's Penn Station

Today, each store is doing anything but giving Kmart the 'good look' Mr. Hall hyped to the press about almost 20 years ago, at least during our tours recently on one summer Friday. The missing attention to detail at each location, slow checkout process, empty shelves and run down fixtures certainly don't inspire a person to visit frequently, if at all.

"The cashiers were so slow, it was really inconvenient," says commuter Victoria Lozier, a now former Kmart Penn Station shopper who decided to take her business elsewhere after consistently being frustrated by the shopping experience.

Years of likely disappointing local Manhattan consumers and visitors to the city could come to a head very soon and threaten Kmart's existence in the area for two reasons.

First, Kmart stands to loss business in Manhattan to cheap chic discounter Target (TGT) when it opens its second location in the area later this fall. The store will be a two-level, 45,000 square-foot location in the trendy TriBeCa neighborhood, and will represent the retailer's latest effort to open small stores in urban markets. Target already has a massive 147,000 square foot store in East Harlem that it opened in 2010.

Meanwhile, pharmacy chain Walgreens Boots Alliance (WBA) continues to enhance the shopping environment of its New York City Duane Reade stores, a one-time rival chain it acquired for $1.1 billion in 2010. It's also nearing the completion of a blockbuster $17.2 billion deal for New York City staple Rite-Aid (RAD) . Once completed, Walgreens will probably embark on a remodeling campaign of Rite-Aid's stores, adding features such as the larger presentations of fresh food and high-end cosmetics now popping up at Duane Reade.

Former Kmart CEO Floyd Hall had high hopes for the chain in New York City.

A taste of what Kmart could be up against from an even larger Walgreens is on display in its backyard of Penn Station. Earlier this year, a Duane Reade opened a few doors down from Kmart's Penn Station site. The store has large exterior windows that act as glass displays to show off beauty products, boxed candy, gift cards, greeting cards and gift items. It stands in stark contrast to the dimly lit Kmart store that lacks many of the premium food and cosmetics products that Manhattan locals and tourists crave.

Ultimately, the situation surrounding Kmart's New York City stores shouldn't be too surprising. Even though it did come as a surprise to long-time Kmart spokeswoman, model and actress Kathy Ireland, who tweeted the following response at TheStreet upon reading our story.

Brian, this is heartbreaking. Kmart's legacy is part of our company's long ago, history. Best wishes 2 their team. https://t.co/95pXOxgwmp

The struggling owner of Sears and Kmart reported a staggering second-quarter loss of $2.03 a share as it felt intense competitive pressures in businesses such as appliances and apparel from Home Depot (HD) , Lowe's (LOW) , J.C. Penney (JCP) , Best Buy (BBY) and Walmart (WMT) . A year ago, the company delivered a loss of $2.03 a share. Net sales plunged 8.8% to $5.7 billion.

Same-store sales at Kmart fell 3.3%, representing the seventh straight quarterly decline. Sales were pressed in some of Kmart's most important categories, such as pharmacy, groceries and consumer electronics.

As for Sears, it notched its eighth consecutive same-store sales decline as sales dived 7%. Weakness was felt across the board for Sears, with sales falling in home appliances, apparel, cosmetics and footwear.

Perhaps more concerning than the sales declines are the dangerously low cash levels for Sears as it gears up for the holidays. Cash and equivalents declined to $276 million from $1.8 billion a year ago. As a result, Sears was forced to accept $300 million in financing from CEO Edward Lampert's investment vehicle ESL Investments.

TheStreet visited each New York City Kmart and came away scratching our heads as to how things have gotten so bad at the formerly storied retailer.